For four quarters running, telecom equipment maker Ciena (NASDAQ:CIEN) has trumped Wall Street's earnings estimates. Twice, it even earned profits in the process. The company returns to Wall Street Thursday morning to give us its full-year results for fiscal 2006, and its Q4 numbers to boot.

What analysts say:

  • Buy, sell, or waffle? Twenty-three analysts still follow Ciena, down one from last quarter. Five of them rate the stock a buy, 17 a hold, and one a sell.

  • Revenues. On average, the analysts expect revenues to grow 35% year over year, to $160 million.

  • Earnings. $0.13 worth of pro forma (which Ciena terms "adjusted earnings") profits are predicted to replace last year's $0.14 pro forma loss.

What management says:
Ciena beat sales estimates last quarter; with Wall Street expecting 30% growth, the firm produced 38% instead. That said, things aren't all they might seem in the profits picture. As you'll recall, last quarter, the firm earned a whole penny's worth of pro forma profit. So on an apples-to-apples basis, Thursday's expected $0.13 profit would ordinarily represent a remarkable improvement. Ordinarily.

However, last quarter, Ciena announced a 7-for-1 reverse split of its shares. As a result, if the firm turns in the expected profit Thursday, that $0.13 would be equivalent to a bit less than $0.02 in profit before its split. That's still an improvement -- just not as big as you might think. Either way, management's making no promises on profits. All it really said last quarter, in the way of guidance, was that we should expect a max of 5% sequential sales growth, or roughly the $160 million that Wall Street is expecting.

What management does:
Ciena's been doing a great job of proving how scalable its business model can be, as its fixed costs get more and more spread out among its rapidly rising revenues, resulting in strong gross margin growth. Farther down the income statement, that's translating into smaller negatives in the operating and net margins. At this rate, the firm just might earn a GAAP profit one day.

Margins %




























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
It doesn't hurt that Ciena is either gaining pricing power, or seeing its raw materials costs fall -- perhaps both. Over the last six months, as sales grew 32%, its cost of goods sold actually declined 1%. That's certainly one way to expand gross margins.

As for operating margins, again, we see the costs of operations falling, with beneficial effects. Selling, general, and administrative costs declined 6% (good), while R&D costs declined 8% year over year. I continue to think that's a bad trend, investing less and less in R&D. But there's no denying that it has helped bring Ciena closer to breakeven on an operating basis.

If I were to seek out one caveat to Ciena's turnaround story, though, it would be found on the balance sheet, where inventories are running amok, up 101% year over year in the past six months, which is much more growth than we'd like to see, relative to sales growth. We'll be looking hard at this line tomorrow.

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Fool contributor Rich Smith does not own shares of any company named above.